Tax Changes Both Help, Hinder Va. Farmers

February 01, 1989|By WILLIAM C. BURLESON Extension Information

Congress has made some recent changes in federal tax law that should help some farmers and raise taxes for others.

Changes adopted by Congress in late October of rules that govern the way farmers may depreciate property for tax purposes will increase the taxes of some farmers, says L. Leon Geyer, Virginia Tech associate professor of agricultural economics.

But Congress also abolished a tax provision that required farmers to pay a federal excise tax on diesel fuel, then apply for a refund.

Geyer says the tax refund system which went into effect last April, drew the wrath of many farmers and started an intense lobbying effort.

Before that, farmers had long been exempt from paying the 15 cents per gallon federal tax on diesel fuel. This year, farmers have been required to pay the tax at the time of purchase, then apply for a refund.

Fuel bills can be a substantial farm expense, and the refund rule effectively deprived farmers of the use of their own money, Geyer says.

The tax collected between April 1 and Dec. 31, 1988, will be refunded with interest. Farmers must apply for the refund by July 1.

As of Jan. 1, farmers will no longer have to pay the excise tax at the time of purchase. To be exempt from the tax, however, farmers will find they have new reporting requirements.

Another tax law change should simplify record keeping for dairy and beef cattle owners, Geyer says.

Since 1987, tax law required the capitalization of preproductive expenses incurred in raising replacement animals (The Heifer Tax). Replacement animals are those raised to become part of a herd, as opposed to animals raised for sale.

The repeal of the Heifer Tax began with the 1989 tax year. There is no change in the law for 1988. This year, farmers are required to use 150 percent depreciating rules instead of the 200 percent rule.

Capitalization rules allow the farmer to depreciate, or deduct, the costs of raising the animal only when it becomes an income producing member of the herd.

This has meant, Geyer says that a farmer had to keep track of these costs over several years - until the animal was grown and producing income - before claiming a deduction.

If farmers elected not to capitalize, they had to use accounting methods that slowed the depreciation process.

The new rule, which went into effect Jan. 1, allows annual deductions for the cost of raising animals. It does not apply, however, to orchards, vineyards and nursery production.

Congress also lengthened the recovery period for determing depreciation of single-purpose agricultural structures from seven to 10 years.

This means the cost of such structures must be depreciated over 10 years, thereby spreading the total cost of a structure over a longer period of time. This effectively decreases the portion of that cost the farmer can deduct each year, thereby raising his taxes.

The recovery period for orchards and vineyards also was increased from seven to 10 years.